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Unemployment: Leveling off or just a retirement influx?

March 9, 2012: 11:46 AM ET

Contrary to what most economists think, aging Baby Boomers entering retirement has largely driven down the unemployment rate.

FORTUNE – In a sign that the economic recovery may be gaining steam, the U.S. added 227,000 net jobs in February -- the third consecutive month where employers added more than 200,000 jobs, the U.S. Labor Department reported Friday.

The unemployment rate remained unchanged at 8.3%, but that's not something to read too much into. After all, the rise and fall of the rate of joblessness is complex, often suggesting neither good nor bad news but rather something in between.

Following a recession, economists often look for a brief rise in the unemployment rate. It signals that an economic recovery is finally in full swing, as previously discouraged workers who gave up looking for jobs start feeling better about their prospects. With more workers returning to the labor force, the jobless rate tends to edge up even as the economy adds new jobs.

But this phenomenon isn't likely coming, says Barclays Capital chief economist Dean Maki. In a recent research report, he makes the argument that the unemployment rate will most likely continue to fall to about 7% by the end of 2013 -- not so much because workers will decide to return to their job hunt, but because of a flux of ageing Baby Boomers retiring. Maki's take strays from the views of most economists, who've said the rate of joblessness has declined partly because some have given up looking for work until things get better.

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Maki offers some interesting statistics:  Between the fourth quarter of 2007 and the same period in 2011, the labor participation rate fell 2.1 percentage points -- the majority of which reflects workers 55 years old and older leaving the labor pool.

This steady decline isn't anything new. For the past 45 years, retiring workers have largely driven down the unemployment rate. And the number of workers in the labor pool fell sharply following the Great Recession as employers slashed jobs. Since the recession, the labor participation rate fell to 64%, compared with 66% between 2003 to 2008.

It remains to be seen if the trend will continue. As my colleague Stephen Gandel points out, the drop in the labor force has slowed recently and actually reversed in February. Maki expects the labor participation rate to continue to fall by about 0.3 to 0.4 percentage points per year as older workers exit the labor pool.

The implications are both good and bad. With workers retiring, it's safe to assume most won't return to the job market. This takes pressure off the economy in the sense that it can create fewer jobs and still keep unemployment stable. Whereas most economists think the U.S. needs to consistently add 100,000 to 125,000 jobs a month to keep up with population growth, Maki says a range of 75,000 to 100,000 a month should be good enough.

But the onslaught of retirees adds pressure to the nation's retirement system, as lawmakers debate an overhaul of the Social Security system. "It means there's less people working and more people retiring," Maki says.

It's uncertain if, and to what extent, those leaving the labor pool have simply decided to retire early. But it wouldn't be all too surprising if some who've been unemployed for a year or more might choose to forgo the hope of a paycheck for income earned from Social Security, given that the majority of long-term unemployed workers are above 50 years old.

Indeed, the unemployment rate has fallen steadily since it peaked at 10% in October 2009. This is generally a positive sign, but workers permanently leaving the job market, as opposed to those standing by the sidelines, largely deserve the credit.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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